Explaining Downward-Rigid CEO Compensation: An Information Asymmetry Perspective

54 Pages Posted: 27 Sep 2017

See all articles by Yiqing Lü

Yiqing Lü

New York University (NYU) - New York University (NYU), Shanghai

Date Written: September 2017

Abstract

CEO compensation rarely gets cut, and almost every component of it increased in early 2000. I consider a two-period contracting problem in which a board privately knows its CEO's matching quality with the firm that changes over time. The board faces a trade-off: Revealing good information makes the CEO work harder, but it is costly. To save the information revelation cost, the board commits to a back-loaded compensation plan that features only upward adjustments in fixed and performance-based pay. This paper also considers extensions in which CEOs have transferable skills and sheds light on bonus caps and compensation disclosure policies.

Keywords: CEO compensation, informed principal, signaling, matching quality, bonus cap, compensation disclosure

JEL Classification: G38, J24, J31, M12

Suggested Citation

Lü, Yiqing, Explaining Downward-Rigid CEO Compensation: An Information Asymmetry Perspective (September 2017). Available at SSRN: https://ssrn.com/abstract=3043079 or http://dx.doi.org/10.2139/ssrn.3043079

Yiqing Lü (Contact Author)

New York University (NYU) - New York University (NYU), Shanghai ( email )

1555 Century Ave
Pudong
Shanghai, Shanghai 200122
China

HOME PAGE: http://www.yiqinglue.com/

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